$3 Weekly Car Rental Rates are Unsustainable

Better technology, education, transparency, and a way to show the correlation between price and customer service are needed.

A co-worker was planning his vacation to Mexico and told me he was seeing car rental rates as low as $3 a day. “What’s the deal?” he asked me. “That can’t be right.” His Spidey sense was tingling, and for good reason. No car rental company makes money at that price.

“Put on your body armor,” I told him, explaining that they’ll make it up at the rental counter with various forms of insurance-type coverages. I’ve seen it myself, actually — a tourist at a rental counter in Mexico getting hammered to buy the full package. After a 10-minute argument, he took the package. But he was not happy.

These coverages have real value to travelers, but when they are used as the car rental company’s main revenue source — and pushed on a customer like a Hulk Hogan body slam — who wouldn’t become downright distrustful of the whole process?

This low-rate problem seems to be focused on a few summer holiday leisure destinations with demand peaks and valleys. Forget $3 a day. In these markets, rates of $3 a week are common during off-peak times. It’s not endemic to the industry, but tell that to the people reading the article “Holiday Car Hire: 10 Ways to Avoid Being Ripped Off” online. It’s easy for ethical operators to be wallpapered over with the same brush.

To say “this has to stop” is a bit naïve to the realities of the situation, but it does have to stop. Of course, there are no easy solutions.

Leisure travelers are price sensitive, to be sure. The percentage of repeat customers in leisure destinations is lower than those with more business rentals or a local customer base, so in theory that guy that got hammered wouldn’t be back to the same rental desk anytime soon. But who wants to run a car rental company that way?

How do you get one company to publish a reasonable rate when others above and below it on the search-result matrix are luring customers with $3 a week? One way is to show the correlation between price and customer service, which actually matters in the so-called commoditized world of car rental.

Brokers such as Auto Europe and CarTrawler have implemented ratings systems; they publish customer reviews and showcase them when displaying rates. Some online travel agencies (OTAs) are about to follow. Yet most meta-search channels, at least in Europe, don’t yet differentiate based on quality.

“This almost forces the supplier to give an unrealistic lead price,” said Bobby Healy, chief technology officer for CarTrawler, during the keynote panel at the 2016 International Car Rental Show (ICRS).

“The $3 car will sell to a certain market segment that will never understand the relationship between price and quality,” said Healy. “But the other 60% or 70% will absolutely walk out the door if they see a low-quality score. No amount of low pricing fixes a bad rating.”

In CarTrawler’s system, 62% of the cars rented are not from the cheapest supplier within the category. CarTrawler’s market is 85% leisure, invalidating the theory that the leisure customer always leads on price.

Imad Khalidi, CEO and president of Auto Europe and co-panelist at ICRS, concurs: A higher rating on his site has a direct correlation to a higher price.

More technology is needed. Healy put forth the idea that revenue management systems need to evolve to measure the effect of a rating or review on price elasticity.

More education is needed. The Brazilian car rental association (ABLA) recently convened seminars in 27 Brazilian states to demonstrate proper expense-to-revenue ratios and how drastically low rates become unsustainable for profitability.

More transparency is needed. Perhaps the OTAs and brokers would be better served by publishing ancillary fee pricing online for each company? Could local car rental associations or groups come up with a set of customer service standards that include greater transparency on rates and fees?

Better customer education is needed. Southwest Airlines is using transparency as a competitive edge in a marketing campaign called “Transfarency,” which touts a lack of extra fees. Could a car rental company take the lead with a similar campaign?

The free market doesn’t seem to be correcting this issue by itself, therefore it is unlikely to in the near future. So it’s up to the folks who deliver the rates and the car rental companies themselves to be proactive. But what’s pushing them? For the brokers, they’d benefit from a fee increase with a higher base rate. For car rental companies, there is the potential to be kicked off an OTA or broker site. And there is always the specter of regulation.

But those threats may not be enough. The consumer may just choose an alternative form of transportation. And at that point, it’s too late.

Comments

K Scott[ May 4, 2016 @ 12:23PM ]

Excellent article, even in New Zealand we are now seeing Mexican type pricing. Two of the causes are the high commission rates charged on base rates and credit cards offering insurance that actually does not cover the client very well.

JC Morga[ May 5, 2016 @ 05:26PM ]

Great article, is is the reality on this market. We have to move to inclusive Rates and increase customer satisfaction in order to have better rates

Rohan Marx[ May 5, 2016 @ 07:56PM ]

Yep, I work for another large broker Airportrentals.com and this is ever increasing throughout the world. The vehicle supplier perception is that you need the cheapest price against competitors to capture the initial customer inquiry. Whilst there is some truth in this, this has just led to an ever increasing number of elements stripped out of the base rental and placed at the back end of the sales process. Staff are then incentivised at the front desk to strongarm the insurance / GPS / gas - mileage / car class upgrade or add on. The loser is the customer. The loser is also the broker typically only paid a percentage on the (ever stripped out) base rental component of rentals. We've started removing these silly stripped out cheap rates from our website. We also make sure that all compulsory fees are shown through the booking process. Its costs us bookings but helps ensure we have the highest trust pilot ranking in car rental

Leslie Saunders[ May 10, 2016 @ 06:46AM ]

We have provided optional insurance to the industry for over 30 years and training on how to offer the products ethically. Sales are up for all our customers and so is service. Understanding the interactions of the products is paramount in the industry. It is not just about scaring the customer.

Leslie Saunders[ May 10, 2016 @ 06:47AM ]

We have provided optional insurance to the industry for over 30 years and training on how to offer the products ethically. Sales are up for all our customers and so is service. Understanding the interactions of the products is paramount in the industry. It is not just about scaring the customer.

Israel Alvarez[ May 10, 2016 @ 06:53AM ]

Awesome article Chris!This is the reality not just in Latin America but in many regions.

Inclusive rates are not the solution, despite the huge interest on this from brokers.Customer service scores should be the key indicator in all websites so consumers can be aware of the levels of excelence at each brand prior the selection.

If a company is not able to meet certain standars then it should be excluded from the OTA/Broker site.

Israel Alvarez[ May 10, 2016 @ 06:53AM ]

Awesome article Chris!This is the reality not just in Latin America but in many regions.

Inclusive rates are not the solution, despite the huge interest on this from brokers.Customer service scores should be the key indicator in all websites so consumers can be aware of the levels of excelence at each brand prior the selection.

If a company is not able to meet certain standars then it should be excluded from the OTA/Broker site.

Bruno Vargas[ May 17, 2016 @ 10:25AM ]

Chris,This is very good article about the car rental industry. This our reality in South Florida . Thx

A. The banners who invest in getting on GDS and attract local players to join the program care less about the client, the experience or the ratings. All they are looking for is volume. I speak from 2 failed partnerships due to lack of transparency and ethical conflicts. The internet is filled with horror stories of bait and switch, 200,000kms/5 year old vehicles, unsafe cars, forced scare tactics to take insurance, etc...

B. There is a lack of leadership on part of Expedia and the rest....as long as they continue to turn a blind eye, this will unfortunately tarnish the car rental's image as a whole.